46667566 Glossary of Re Insurance Terms

8/6/2019 46667566 Glossary of Re Insurance Terms

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GLOSSARY OF REINSURANCE TERMINOLOGY

Term DefinitionAccident Year

Experience

Reinsurance experience calculated by matching the total value of all losses

occurring during a 12-month period with premiums earned for the sameperiod.

Acquisition Costs All expenses directly related to acquiring insurance or reinsuranceaccounts; normally the commission paid to the reinsurance company as anoffset against its agents commission, premium taxes and other costs ofdoing business; includes reinsurance brokers commission where applicable.

Admitted Reinsurance(AuthorizedReinsurance)

Reinsurance for which credit is given for the unearned premiums andunpaid claims in a ceding companys Annual Statement because thereinsurance is placed in an admitted reinsurance company and is licensedto transact business in the jurisdiction in question.

Admitted Assets Assets recognized and accepted by state departments of insurance whendetermining the solvency of insurers or reinsurers.

Adverse Selection(Anti-Selection,

Selection of Risk)

The conscious and deliberate cession of those risks, segments of risk, orcoverages that appear less attractive for retention by the ceding company;

the practice of ceding poorer business to the reinsurer while retaining thebetter business.

Aggregate The dollar amount of reinsurance coverage during one specified period,usually 12 months, for all reinsurance losses sustained under a treatyduring such period.

Aggregate ExcessReinsurance Treaty(Stop Loss Treaty,Aggregate Excess ofLoss Reinsurance orExcess of Loss RatioReinsurance)

A form of reinsurance where the reinsurer indemnifies the ceding companyfor the amount by which the ceding companys aggregate losses of aspecified class of business exceed a specified loss ratio or a specified dollaramount; used primarily in classes of insurance with wide fluctuation inlosses from year to year, such as hail insurance.

Aggregate ExtensionClause

Stipulates that all aggregate original policies will attach on a risk inceptingduring the period basis, and describes a manner in which attachment date

of a policy or policies is determined; determines how the aggregate iscalculated in the event that one loss affects more than one policy or morethan one insured; applies to casualty excess of loss business only.

Aggregate WorkingExcess(Aggregate AnnualDeductible)

A form of per risk excess reinsurance under which the primary companyretains its normal retention on each risk and additionally retains anaggregate amount of the losses which exceeds normal retention.

Alien Company An insurer or reinsurer domiciled outside the U.S. but who is conductinginsurance or reinsurance business in the U.S.

Alternative RiskMechanism

A method of financing primary property and/or casualty losses withoutusing traditional insurers to assume risk in the primary layer; two principaltypes of alternative risk mechanisms are self-insurance and captiveinsurance companies.

Annual AggregateDeductible A provision in excess of loss reinsurance contracts stipulating that theceding company will retain, in addition to its retention per risk or peroccurrence, an annual aggregate amount of loss that would otherwise berecoverable from the reinsurer; expressed as a dollar amount or apercentage of the ceding companys subject premium for the annualperiod; caps the amount of loss the insured may be required to pay beforethe insurance responds.

Annual Statement(Statutory AnnualStatement, ConventionBlank)

The annual report format prescribed by the NAIC and the statedepartments of insurance; provides a summary of the companys financialoperations for a calendar year, including a balance sheet supported bydetailed exhibits and schedules; is filed with the state insurancedepartment of each jurisdiction in which the company is licensed to conductbusiness.


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Term DefinitionArbitration Clause Language providing an alternative dispute resolution forum to resolve

differences between the reinsurer and the ceding company withoutlitigation.

As If A term used to describe the recalculation of prior years of loss experienceto demonstrate what the underwriting results of a particular program wouldhave been as if the proposed program had been inforce during that period.

Assumed Portfolio(Return Portfolio)

The transfer of in-force insurance liability by an insurer to a reinsurer bythe payment of the unearned premiums reserve on those policies alone, orby the concurrent transfer of liability for outstanding losses under thosepolicies by the payment of the outstanding loss reserve by the insurer tothe reinsurer; the former is a premium portfolio, the latter a loss portfolio.

Assumption Certification(Cut Through Clause,Strike-Through Clause)

Type of insolvency clause providing that in the event of insolvency of aceding company, reinsurer will be liable for his share of the loss, but losswill be payable to the direct insured rather than liquidator.

Attachment Point The loss level specified in the terms of the reinsurance contract betweenthe primary insurer and reinsurer; the amount at which excess reinsuranceprotection comes into effect; the retention under an excess reinsurancecontract.

Authorization A quotation made by a reinsurer that is valid for a specified period of time;the insurer may bind coverage to be effective at any date within thatperiod, provided the reinsurer is notified during that period.

Automatic Reinsurance Reinsurance of individual risks where the reinsurer assumes liability basedentirely on the acceptance of the ceding company; a reinsurance contractthat is a combination of treaty and individual facultative reinsurance;reinsures a group of policies and often applies per policy, rather than peroccurrence.

Backup Security(Collateral)

Makes acceptable a reinsurer that would otherwise not meet the securitycriteria of the primary insurer.

Balance The relationship of the written premium of the treaty to the maximum limitof liability to which the reinsurer is exposed; when the ratio desired isachieved, the treaty is considered balanced.

Banking Plan(Advance DepositPremium Plan)

An agreement in which the ceding company pays the reinsurer a premiumover a specified number of years which is intended to fully fund a specificlimit of liability; if the premium is not fully expended by payment of losseswithin the contract period, the unused portion is returnable, less areinsurance expense.

Base Premium(Subject Premium,Premium Base,Underlying Premium)

The ceding companys premium (written or earned) to which thereinsurance premium rate is applied to produce the reinsurance premium.

Basic Limits The minimum amounts of insurance for which it is the practice to quotepremiums in liability insurance; additional amounts are charged for by theaddition of certain percentages of the premium for the minimum (basic)limits.

Bests Capital Adequacy

Relativity(BCAR)

Measures a companys relative capital strength compared to its industry

peer composite.

Bests Rating A quantitative and qualitative evaluation of a companys financial conditionand operating performance performed by the rating agency of A.M. BestsCompany.

Binding Agreement A reinsurance contract under which the reinsurer allows itself to be bound,within a specified grace period, on any risk that meets the criteria outlinedin the contract.

Blended Covers Prospective reinsurance that combines elements of both traditional andfinancial reinsurance to limit risk transfer, while allowing reinsuranceaccounting treatment under both GAAP and Statutory bases.

Bordereau A report or list, furnished to the reinsurer by the ceding company, detailing


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Term Definition(Bordereaux) the reinsurance premiums and/or reinsurance losses with respect to specific

risks ceded in agreement.

Buffer Layer Used primarily in facultative reinsurance to describe a reinsured layer ofcoverage between the maximum retention within the primary policy limitthat the ceding company issues and the minimum limit(s) or deductibleover which the excess or umbrella insurer will provided coverage.

Burning Cost A term most frequently used in spread loss property reinsurance to expresspure loss cost or the ratio of incurred losses within a specified amount inexcess of the ceding companys retention to its gross premiums over astipulated number of years.

Calendar YearExperience

Reinsurance experience calculated by matching total value of all lossesincurred during a given 12 month period with the premiums earned forsame period.

Cancellation Run-off Cancellation means that the liability of the reinsurer under policies,which became effective under the treaty prior to the cancellation date ofsuch treaty, shall continue until the expiration date of each policy; Cut-offCancellation means that the liability of the reinsurer under policies, whichbecame effective under the treaty prior to the cancellation date of suchtreaty, shall cease with respect to losses resulting from accidents takingplace on and after said cancellation date.

Capacity(Underwriting Capacity)

The largest amount of insurance or reinsurance available from a companyon a given risk; the maximum volume of business a company is preparedto accept; a measure of an insurers or reinsurers financial strength toissue contracts of insurance or reinsurance; may be imposed by law orregulatory authority.

Captive InsuranceCompany

A reinsurance company, often located offshore, which is owned by acorporation or association and provides reinsurance of direct insurancewritten to insure the corporation or the associations members; a stockinsurance company that insures the risk of its owners; often involves theuse of a domestic Fronting Company.

Carveout A type of reinsurance that reinsures a cedents exposure for a discrete

exposure that is normally part of a broader coverage or line of businessreinsurance contract; normally written facultatively; may be related to aline of business, e.g. cancer or transplants with respect to medical benefits.

CatastropheAccumulation

The amount of potential loss an insurance or reinsurance company may beexposed to in a single catastrophic loss event, such as an earthquake or ahurricane.

Catastrophe Number Whenever a catastrophe occurs which produces losses within a prescribedperiod of time in excess of a certain amount, the amount of such losses isrecorded separately from non-catastrophe losses, is numbered, and may betreated differently in the statistical experience records of the state used insetting rate levels.

CatastropheReinsurance

A form of excess of loss reinsurance, subject to a specific limit, whichindemnifies the ceding company in excess of a specified retention foraccumulation of losses from catastrophic occurrence.

Cede To transfer to a reinsurer all or part of the insurance risk written by aceding company; the laying off of all or part of the risk relating to a policy,or group of policies to a reinsurer.

Ceding Commission An amount allowed by reinsurer for part or all of ceding companysacquisition costs, overhead costs and taxes; usually a percentage of thereinsurance premium; ceding commission may also include a profit factorfor the reinsured.

Ceding Company(Cedent, Reinsured,Reassured)

The insurer which cedes all or part of insurance risk written to another.

Certificate A short form documentation of a reinsurance transaction usuallyincorporating complete terms and conditions by reference.


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Term DefinitionCession The amount of insurance risk transferred to a reinsurer by a ceding

company; may be the whole or a portion of a single risk, defined policy ordefined division of a policy as agreed.

Cessions Limit The capped amount of catastrophe-exposed business ceded to thereinsurance contract.

Claims CooperationClause

A clause found in many reinsurance contracts that stipulates that theceding company agrees to consult and cooperate with the reinsurer onclaims handling and settlement.

Claims-Made Basis The provision in a contract of insurance or reinsurance that coverageapplies only to losses which occur and claims that are made during theterm of the contract; once the policy period is over, the approximate extentof the underwriters liability is known; with claims-made covers which arerenewed, losses which occurred during any period when the policy wasinforce are covered if reported during the renewal term.

Claims-MadeReinsurance(Loss Sustained Cover)

A type of reinsurance contract covering claims that are first made to thereinsurer during the term of contract, regardless of when they weresustained; a blend of retroactive and prospective reinsurance.

Clash Cover(Casualty CatastropheCover, ContingencyCover, ConflagrationCover, Excess Cover)

A form of per-occurrence casualty excess of loss reinsurance in which theceding companys retention is higher than the limits on any one reinsuredpolicy; the agreement is only exposed to loss when two or more casualtypolicies are involved in a common occurrence in an amount greater thanthe clash cover retention.

Coinsurance A form of life reinsurance where the amount in excess of the cedingcompanys retention is reinsured on the same plan as that of the originalpolicy the reinsurer receives the gross premium charged the policyholderon the reinsured part of the policy less expense allowances granted theceding company by the reinsurer; the reinsurer must maintain regularpolicy reserves and is liable not only for its share of death claims, but alsofor cash surrender values and other nonforfeiture benefits and loanprivileges.

Combination Plan

Reinsurance

A form of combined reinsurance which provides that in consideration of a

premium at a fixed percent of the ceding companys subject premium onthe business covered, the reinsurer will indemnify the ceding companyagainst the amount of loss on each risk in excess of a specified retentionsubject to a specified limit; after deducting the excess recoveries on eachrisk, the reinsurer will indemnify the ceding company against a fixed quotashare percent of all remaining losses.

Combined Ratio(Operating Ratio, TradeRatio)

The total of the Incurred Loss Ratio and the Expense Ratio.

CommutationAgreement(Commutation Clause)

An agreement between the ceding company and the reinsurer providing forthe valuation, payment and complete discharge of all future obligationbetween parties under reinsurance contract regardless of the continuingnature of certain losses; the process of settling current outstanding andexpected future obligations under a reinsurance contract.

Concurrent Policies Where a ceding company buys more than one policy covering the sameinterest and the total amount insured is not in excess of the insurancevalue of the risk; the policies may be placed with the same or differentcompanies; losses are pro-rated among the policies.

Conflagration A massive fire which destroys many contiguous properties.

Conflagration Area A geographic territory in which many properties are subject to damage by asweeping fire.

Contingent Commission(Profit Commission)

A commission payable to the ceding company in addition to the normalceding commission allowance; predetermined percentage of the reinsurersnet profits, less overhead.

Continuous Contract A reinsurance contract that remains in effect until both parties mutuallyagree to terminate it or one of the parties sends the other a notice of


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Term Definitioncancellation.

Contributing Excess Where there is more than one reinsurer sharing a line of insurance on arisk in excess of a specified retention, each such reinsurer shall contributetowards any excess loss in proportion to his original participation in suchrisk.

Co-Reinsurance Where the ceding company has a participation in the reinsurance cover orwhere there are several reinsurers on the same reinsurance program.

Corridor Deductible An arrangement where the reinsurer pays a portion of the loss, up to acertain amount, then the ceding company pays the losses in excessthereof, up to a certain amount, and the reinsurer pays in excess of that.

Cover Note(Binder)

A document issued by an intermediary, temporarily recording theprovisions of a reinsurance agreement pending execution of the formalreinsurance contract; outlines terms and conditions and indicates thatcoverage has been effected.

Credit Carry-Forward The transfer of credit or profit from one accounting period under a spreadloss or other form of long-term reinsurance treaty to the succeedingaccounting period.

Credit For Reinsurance A statutory accounting procedure permitting ceding company to treatamounts due from reinsurers as assets or reductions from liability based onstatus of reinsurer.

Cumulative CollusiveExcess Cover

A form of reinsurance contract by the terms of which a ceding companymay further reduce its net exposure on multiple recovery bonds which havebeen share reinsured.

Cumulative Exposure(Multi-Year Stacking ofCoverage)

The liability potential for multiple policies issued over multiple years by asingle insurance company to a single insured being held to apply tocontinuing injury or damage.

Cumulative Liability The risk of a reinsurer accumulating liability when many reinsurancepolicies issued to different reinsureds covering different lines of insuranceare involved in a common event or disaster.

Cut-Off The termination provision of a reinsurance contract that stipulates that thereinsurer shall not be liable of losses resulting from occurrences that take

place after the date of termination or after an agreed-upon date followingtermination; normally involves the return of unearned premium for policiesinforce at the cut-off date.

Cut-ThroughEndorsement(AssumptionEndorsement,Assumption Certificate,Strike-Through Clause)

A statement of coverage by the reinsurer (typically attached to theinsurance policy) under which a direct payment obligation is created to aparty not in privity with the reinsurer; the coverage is triggered by aspecific event, such as the insurers insolvency; the claim payment cutsthrough the usual route of payment to the ceding company; effect is torevise the route of the claim payment with no intent to increase the risk tothe reinsurer.

Declaratory JudgmentExpense

Expenses incurred by an insurer in a declaratory judgment action broughtto determine whether there is coverage under a policy.

Deductible Buyback(Difference In

Deductible Cover, DID)

Reinsurance purchased by a ceding company within the deductible itrequires the insured to hold.

Deficit Amounts by which losses, expenses and profit margin exceed premiums atthe end of any accounting period which become a charge in thecomputation for the succeeding accounting period; a term used in formulasfor calculating adjustable features, such as retrospective rating plans andcontingent commission.

Deficit Carry-Forward orCarry Back

The transfer of deficit or loss from one accounting period to the subsequentperiod.

Deposit Premium(Provisional Premium,Advance Premium,Premium Advance)

A tentative premium payable either at the beginning of an annual term of areinsurance contract or in quarterly or semi-annual payments during theannual term; actual premium is balanced against the deposit premium, andthe difference due either the ceding company or the reinsurer is remitted


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Term Definitionon those types of insurance or reinsurance subject to periodic premiumadjustment.

Direct WritingReinsurance(Direct Reinsurer, DirectWriter)

A reinsurance company which develops its business, and deals with cedingcompanies directly, by using own personnel, without the use of areinsurance intermediary.

Direct Written Premium The gross premium income (written instead of earned) of a cedingcompany, adjusted for additional or return premiums but before deductingany premiums for reinsurance ceded and not including any premiums forreinsurance assumed.

Discounted Stop LossCover

Prospective financial reinsurance where the premium is based upondiscounted anticipated reinsurers outflow from the liabilities assumedunder the contract.

Discovery Cover A type of reinsurance treaty covering losses which are discovered duringthe term of the treaty regardless of when they were sustained.

Domestic Insurer An insurance company formed under the laws of a given state; aninsurance company conducting business in its domicilary state from which

it received its charter to write insurance.Drop Down Clause A provision that specifies that the excess layer will drop down and attachif the limits of the primary layer or the retention are exhausted.

Early Warning Tests Financial ratio and performance criteria designed by the NAIC to identifyinsurance companies which may need close surveillance by state insurancedepartments.

Earned Premium Part of premium applicable to expired portion of policies reinsured, or thatpart earned under reinsurance contract; includes the short-rate premiumon cancellation, the entire premium on the amount of loss paid under somecontracts, and the entire premium on the contract on the expiration of thepolicy; that portion of the reinsurance premium calculated on a monthly,quarterly or annual basis which is to be retained by the reinsurer shouldthe cession be canceled; when a premium is paid in advance for a certaintime, the company is said to earn the premium as the time advances, for

example, a policy written for three years and paid for in advance would beone-third earned at the end of the first year.

Equivalent Flat Rate In treaty reinsurance pricing, reinsurance charges are calculated for eachlevel of exposure above the selected retention; the sum of all excessreinsurance charges, divided by the base premium, is the equivalent flatrate.

Errors and OmissionsClause

A clause usually included in an obligatory reinsurance contract to ensurethat an error or omission in reporting a risk, which would otherwise fallwithin the automatic reinsurance coverage under such a contract, shall notrelieve the reinsurer of liability on such omitted risk.

Evergreen Clause A term in a Letter of Credit providing for automatic renewal of the credit.

Ex Gratia Payment A payment made by the ceding company, despite the fact that it may notbe liable under the terms of the policy; such payment may or may not becovered under a reinsurance contract and is usually made in lieu of insuring

greater legal expenses in defending a claim; rarely encountered inreinsurance as the reinsurer follows the fortunes of the ceding company.

Excess Judgment Loss The amount paid by a liability insurer in excess of applicable policy limitsoccasioned by the failure, on account of negligence or bad faith, to settle aclaim for an amount within such policy limits.

Excess Limits Premium In casualty insurance, premiums for limits of liability added to basic limits,calculated as multiples of basic limits premium; the original and mostpopular basis of premium paid for casualty excess of loss insurance.

Excess of LineReinsurance

A form of per risk excess agreement under which the indemnity is not afixed dollar limit but a multiple of the primary companys net retention.

Excess of LossReinsurance

Reinsurance which indemnifies the ceding company against loss in excessof specific retention including catastrophe reinsurance, risk reinsurance, per


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Term Definition(Non-ProportionalReinsurance)

occurrence and aggregate excess of loss reinsurance.

Excess Per RiskReinsurance

A form of excess of loss reinsurance which, subject to a specified limit,indemnifies the ceding company against the amount of loss in excess of aspecified retention with respect to each risk involved in each occurrence.

Exclusions Those risks, perils, classes of insurance or other insurance companyliabilities on which the reinsurer will not pay losses or provide reinsurance,notwithstanding the other terms and condition of reinsurance.

Expense Ratio(Operating Ratio)

The ratio of expenses incurred expressed as a percentage of writtenpremium; the portion of premium used to pay all the cost of acquiring,writing and servicing insurance and reinsurance.

Experience The loss record of an insured or of a class of coverage; classified statisticsof events connected with insurance; the out-go or income, actual orestimated of what happened in the past; figures may be compiled onaccident year basis, calendar year basis or policy year basis; forunderwriting purposes, the comparison of earned premium to incurredlosses.

Experience Balance A feature of a reinsurance contract that keeps track of the revenues andcosts between the parties.

Experience Rating(Loss Rating)

A rating method in which the prospective premium is based on the pastlosses on the account.

Experience Refund In life reinsurance, a predetermined percentage of the net reinsuranceprofit which the reinsurer returns to the ceding company as a form of profitsharing at year end.

Exposure Rating(Manual Rating, TariffRating)

A system for premium development and risk classification where filed rates,rules and classifications are applied against premium exposures, asdetermined by the manuals of insurance developed independently byinsurance companies or by independent rating organizations, such as theInsurance Services Office, Inc. (ISO).

Extra-ContractualObligations Clause

(ECO, Extra-ContractualDamages, Loss InExcess of Policy Limits)

Monetary damages awarded to the insured by a court of law for negligenceon the part of the ceding company; such payments are beyond the scope of

insurance provided by the ceding company to its insureds; a reinsurancecontract may cover these damages and protect the ceding companyagainst all or part of its liability arising from claim settlement activities andfalling outside policy provisions.

Extraction Factor A fraction or percentage of a reinsured companys subject premiumdeducted from the reinsurance premium to recognize and measure thatportion of any policies not covered by reinsurance when the policies arewritten by the reinsured on an indivisible premium basis.

Facultative Certificate ofReinsurance

A contract formalizing a reinsurance cession on a specific risk; contains adeclarations page, reinsurance terms and conditions and, except to theextent to which it is non-concurrent, incorporates by reference the termsand conditions of the ceding companys policy form.

Facultative ObligatoryContract

A reinsurance contract with characteristics of both facultative and treatyreinsurance; a treaty under which the ceding company may cede risks of a

defined class that the reinsurer must accept.Facultative Reinsurance Reinsurance of individual risks by offer and acceptance for each cession;

both ceding company and reinsurer have the faculty, or option, to engagein negotiations over individual submissions.

Facultative Treaty(Facultative BindingAuthority)

A reinsurance contract under which the ceding company must cede and thereinsurer must accept exposure or risks of a defined class.

Financial Quota Share A quota share reinsurance transaction that elicits significant financialbenefits over risk transfer benefits through the use of ceding commissions,potential investment income sharing and liability limits.

Financial Reinsurance(Finite-Risk

A specialized form of limited liability reinsurance whereby the financial andstrategic motivations of the ceding company to affect the transaction take


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Term DefinitionReinsurance, Limited-Risk Reinsurance, Non-Traditional Reinsurance)

precedence over the risk transfer motivation.

Financing Function One purpose of reinsurance; whenever the reinsurer relieves the cedingcompany of all or part of the companys responsibility for carrying anunearned premium reserve and the reinsurer allows a ceding commissionto the ceding company; because the cash or other statutorily recognizedassets being transferred are less than the unearned premium reservechange, the ceding companys policyholder surplus is increased by theamount of the reinsurance commission allowance.

Finite Reinsurance(NontraditionalReinsurance, LimitedRisk Reinsurance,Financial Reinsurance)

Used to describe a broad spectrum of treaty reinsurance arrangementsproviding coverage at lower margins; often multi-year and financiallyoriented.

Finite Risk Reinsurance Agreements which transfer a limited amount of risk to the reinsurer, withthe objective of improving the primary insurers financial results; lossportfolio reinsurance is a common kind of finite risk reinsurance.

First Surplus Treaty A contract where the reinsurer shares the risk with the ceding company ona pro-rata basis, and where the proportion is sometimes fixed andsometimes varied according to different classes of risks, as are the netretentions the ceding company keeps for its own accounts.

Following the Fortunes(Follow the Settlements,Pay As May Be Paid)

A concept in reinsurance indicating that once a risk has been ceded by thereinsured, the reinsurer is bound by the same fate thereon as experiencedby the ceding company; clauses to ensure that the reinsurer will follow,abide by or be subject to the fortunes, settlement, liabilities, decisions oradjustments of the reinsured.

Foreign Reinsurer A U.S. reinsurer conducting business in a state other than its domiciliarystate; formed under the laws of state other than the state in which the riskis located.

Franchise Covers A deductible that does not apply if the loss exceeds the deductible amount;

when that amount is exceeded, then the whole loss is paid.Fronting Arrangement(Fronting Company,Issuing CarrierArrangement)

An arrangement whereby one insurer issues a policy on a risk for and atthe request of one or more other insurers with the intent of passing theentire risk by way of reinsurance to the other insurer(s); the issuance of apolicy by one insurer on behalf of a second insurer because the secondinsurer is not licensed or admitted in the state of jurisdiction for the line ofbusiness being written; the first insurer issues the policy to the insured,and is reinsured for its liability by the second insurer; such arrangementsmay be illegal if the purpose is to frustrate regulatory requirements.

Funding Cover A multi-year reinsurance contract that allows the cedent to bank arelatively stable premium over time and access the bank whenunanticipated insurance liabilities arise.

Funding of Reserve(Outstanding Claims

Account)

An arrangement sometimes used in the case of non-admitted reinsurerswhereby the ceding company retains funds of the reinsurer equivalent to

outstanding loss reserves.Funds Withheld(Funds Held Account)

Provision in a treaty under which premium due the reinsurer, usuallyunauthorized, is withheld to enable ceding company to reduce the provisionfor unauthorized reinsurance in its Annual Statement.

Generally AcceptedAccounting Principles(GAAP)

A method of reporting the financial results of an insurer more in accordancewith the going-concern basis used by other businesses; assigns income anddisbursements to their proper period, as distinguished from the moreconservative requirements of statutory accounting affecting insurers.

GNEPI Gross Net Earned Premium Income.

GNWPI Gross Net Written Premium Income.

Gross Line The total limit of liability accepted by insurer on an individual risk, includingthe amount it has reinsured; net line plus reinsurance ceded.


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Term DefinitionGross Net Premium A ceding companys total gross premium before the deduction of any

commissions or costs, but after the deduction of reinsurance costs.

Ground-Up Loss The total amount of loss sustained before deductions are applied forreinsurance covers which inure to the benefit of the cover being consideredand before the application of a deductible.

Guaranteed Cost Premium charged on a prospective basis which may be fixed or adjustableon a specified rating basis but never on a basis of loss experience.

Hazard Refers to the possible causes of loss in casualty insurance.

Honorable Undertaking This self-explanatory clause is in most reinsurance treaties, and reads asfollows: This agreement is considered by the parties hereto as anhonorable undertaking, the purpose of which is not to be defeated by astrict or narrow interpretation of the language thereof.

Hourly Clauses Clauses used to set time parameters for losses to be included within thesingle event; catastrophe reinsurance treaties respond to losses incurred byan insurance company in a single event and it is often difficult to definedprecisely which losses were caused by a certain event.

Incurred But Not

Reported(IBNR)

The loss reserve value established in recognition of liability for future

payments on losses which have occurred but have not yet been reportedeither to the ceding company or to the reinsurer; expected futuredevelopment on claims already reported.

Incurred Loss Ratio The ratio of losses incurred to premiums earned.

Incurred Losses An amount representing the losses paid plus the change in outstanding lossreserves within a given period of time; losses which have happened andwhich will result in a claim under the terms of an insurance policy or areinsurance agreement.

Indexing A procedure which adjusts retention and limit provisions of excess of lossreinsurance agreements in accordance with the fluctuations of a publishedeconomic index such as wage, price, cost-of-living, etc.

Industry Loss Warranty A clause requiring that the industry loss must be of a certain size for thecatastrophe reinsurance cover to respond.

Inflation Factor A loading to provide for increased expense costs and loss payments in the

future due to inflation.Insolvency Clause The clause (often required by state law) which may hold the reinsurer liable

for its share of loss assumed under the treaty even though the cedingcompany has become insolvent; specifies to whom payment shall be made;proceeds are usually paid to the liquidator of an insolvent insurer on validclaims and not reduced.

Insurance RegulatoryInformation System(IRIS)

A series of tests developed by the NAIC to assist states in overseeing thefinancial condition of insurance companies.

Insurance Risk The concept of uncertainty about the ultimate amount of net cash flow frompremiums, commissions, claims and claims-settlement expenses emanatingfrom a cession of contractually-defined liabilities and the timing of thereceipt and payment of those cash flows.

Interests and Liabilities

Agreement

A reinsurance contract between multiple reinsurers and a single ceding

company that establishes the responsibilities of each reinsurer.Interlocking Clause Used only in conjunction with Aggregate Extension Clause; describes the

manner or calculation of attachment point and amount of liability in theevent that one aggregate loss affects more than one treaty year.

Intermediary Clause A contractual provision, required by statute as a prerequisite to receivingcredit for reinsurance, in which parties agree to effect all transactionsthrough an intermediary and the credit risk of the intermediary is imposedon the reinsurer.

Investment Income Money earned from invested assets; may include realized capital gains, orbe reduced by capital losses, over the same period.

Investment IncomeSharing

A contractual reinsurance feature (usually of financial reinsurance) wherebyinterest on the float generated by the contract is shared.


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Term DefinitionKenney Rule The ratio of an insurers net premium writings to its policyholder surplus

which is considered safe; for multiple line companies, the ratio is 3:1.

Large-Line Capacity Refers to an insurers ability to provide a high limit of insurance for a singlerisk.

Law of Large Numbers A mathematical concept which postulates that the more times an event isrepeated the more predictable the outcome becomes.

Layer Rating The prediction of loss frequency and severity within a given layer.

Lead (Following)Reinsurer

The Lead Reinsurer sets the terms and conditions of an insurance contractwhen two or more reinsurers participate; often also has the largest share,but not always; Following Reinsurers generally agree to be bound by theterms set by the Lead.

Letter of Credit(LOC)

A banking instrument used to secure recoverables from non-admittedreinsurers to reduce the provision for unauthorized reinsurance in theStatutory Statement; stand-by credits in the event of non-performance bythe obligor.

Leverage Ratio(Ceded Reinsurance

Leverage)

The ratio of the reinsurance premiums ceded, plus net ceded reinsurancebalances from non-affiliates and foreign affiliates, for paid losses, unpaid

losses, incurred but not reported losses, unearned premiums andcommissions, less funds held from reinsurers, plus ceded reinsurancebalances payable, to policyholder surplus; measures a companys potentialexposure to adjustments on such reinsurance and it dependence upon thesecurity provided by its reinsurers; a ratio higher than 1.3 is consideredabove the accepted norm for this test.

Leveraged Effect The disproportionate result produced by inflation on a reinsurers liability inexcess of loss reinsurance compared with the ceding companys liability.

Licensed PrimaryInsurer(Admitted PrimaryInsurer)

Insurer who has been granted a license to operate in a particular state.

Line An amount of risk or liability equal to that which the ceding companyretains for its own account; the limit of insurance fixed by the ceding

company on a class of risk (line limit) or the actual amount that it hasaccepted on a single risk or other unit; a class or type of insurance orreinsurance; line of business; a category of reinsurance; pertains to thesurplus reinsurance; the amount of the reinsurers retention per each risk.

Line Sheet(Line Guide)

A schedule showing the limits of liability to be written by a ceding companyfor different classes of risk.

Lloyds of London An insurance marketplace headquartered in London, England where risksare shared among individuals and corporations (Names) that are membersof underwriting syndicates, and who provide the financial backing to thebusiness; Lloyds can act as either a primary insurer or reinsurer; SyndicateUnderwriting Managers conduct the actual risk underwriting; LloydsCorporation provides service facilities for the underwriters.

Long-Tail Liability A term used to describe certain types of third-party liability exposureswhere the incidence of loss and the determination of damages are

frequently subject to delays which extend beyond the term the insurance orreinsurance was inforce; malpractice, products liability, errors andomissions.

Loss AdjustmentExpense(LAE, Allocated LossAdjustment Expense,ALAE, Unallocated LossAdjustment Expense,ULAE)

Allocated - expenses incurred by the ceding company to investigate, defendand settle claims under its policies and which it specifically allocates toclaim; directly identifiable expenses distinct to a particular claim;Unallocated - includes the insurers overhead expenses and other costs ofdoing business such as payments to salaried employees ; cannot bespecifically designated to a particular claim.

Loss Carry-Forward In life reinsurance, if in any calendar year, the claims and expenses exceedthe premiums, the resulting net reinsurance loss is carried forward to the


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Term Definitionnext years experience refund calculation.

Loss Cost The portion of the premium rate that is applicable solely to loss, withoutprovision for company expenses or profits.

Loss Development(Loss Lag)

The difference between the estimated amount of loss initially reported andthe amount of an evaluation of the same loss at a later date or the amountpaid in final settlement.

Loss DevelopmentFactor(LDF)

Derived by mathematical analysis of the development of losses from initialreporting and reserving to final closure or settlement; used to projectlosses to their ultimate value; derived from line of business loss triangles;tool used by underwriters to set risk premium requirements.

Loss Distribution Scale Scales that suggest distribution of ground-up premium throughout thelayers in a risk.

Loss Event(Occurrence)

The total losses to the ceding company or the reinsurer, resulting from asingle cause.

Loss In Excess of PolicyLimits

A loss sustained by a primary carrier that is greater than the policy limitsissued by it, due to negligence or bad faith failure to settle the claim withinthe policy limits when it had the opportunity to do so; reinsurance treaties

usually provide for partial payment of such losses.Loss Multiplier Used in retrospective reinsurance rating plans to convert losses to premiumand provide for reinsurers loss adjustment expense, overhead and profitmargin, subject to established maximums and minimums.

Loss Portfolio Transfer Cession of a contractually-defined set of outstanding liabilities assumed bythe reinsurer for a consideration; liabilities are retroactive.

Loss Ratio Proportionate relationship of incurred losses to earned premiums expressedas a percentage.

Loss Reserve An estimate of the amount of outstanding loss remaining to be paid for thereported claim; estimated expected payments for reported and unreportedclaims.

Loss Sustained Cover A type of reinsurance treaty covering only those losses which are sustainedduring the term of the treaty.

Loss Trend Factor Project known or developed ultimate losses to future cost levels for a future

coverage period; primarily applied in lines of business that are adverselyaffected by inflation, e.g. Automobile and General Liability.

Manual Excess The premium for excess amounts of insurance, as determined by tables offactors for increased limits of liability, set forth in the manuals used bycasualty insurance companies; a logical basis for rating excess of losscasualty reinsurance.

Master Certificate Provides coverage for risks that fall into certain specified parameters andare added by periodic endorsements.

Maximum ForeseeableLoss(MFL)

The anticipated maximum property fire loss that could result given unusualor the worst circumstances with respect to the non-functioning of protectivefeatures.

Minimum Premium The least premium charge applicable, frequently used in excess of lossreinsurance contracts or catastrophe covers which contain a provision thatthe final adjusted premium may not be less than a stated amount.

Modified Coinsurance In life insurance, coinsurance under which the ceding company retains andmaintains the total reserve; the annual reserve increase, adjusted forinterest on the previous years reserves, is transferred from the reinsurer tothe ceding company at year end.

Multi-Year Reinsurance Prospective reinsurance contracts covering occurrences in a periodexceeding one year and containing cancellation restrictions for the cedingcompany and/or the reinsurer.

National Assoc. ofInsuranceCommissioners(NAIC)

The chief insurance regulatory officials of the 50 states

Net Line The amount of insurance a ceding company (or reinsurer) has at risk after


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Term Definitiondeducting reinsurance (or retrocessional recoveries) from its gross line; themaximum amount of loss on a particular risk to which an insurer orreinsurer exposes itself without reinsurance.

Net Loss The amount of loss sustained by a ceding company after deducting allrecoveries, salvage, and reinsurance; may not include allocated lossadjustment expenses.

Net Retention(Net Retained Liability,First Loss Retention,Attachment Point)

The amount of insurance which a ceding company keeps for its ownaccount and does not reinsure in any way; the amount of loss sustained bythe ceding company before the liability of the excess of loss reinsurerattaches.

Ninety Day Rule The Annual Statement requirement that insurer must establish liabilityprovision for balances when recoverables over ninety days past due.

Non-AdmittedReinsurance

Reinsurance provided by a non-admitted reinsurance company, one whichis not licensed in the state, and thereby not recognized by the insuranceregulatory authority; such reinsurance may not be treated as an asset onthe financial statements of the ceding company unless it is properlysecured by a funds-withheld arrangement, letter of credit or trustagreement.

Non-ConcurrentReinsurance

Applies to those hazard or risks of loss or damage that are specificallydescribed in the reinsurance contract.

Non-ProportionalReinsurance

Reinsurance under which the reinsurers participation in a loss depends onthe size of the loss; claim payments are made to the ceding company whenthe ceding companys claims exceed a predetermined loss limit.

Obligatory Treaty(Automatic Treaty,Obligatory Contract,Binding Agreement,Facultative Automatic)

A reinsurance contract under which the subject business must be ceded bythe ceding company in accordance with contract terms and must beaccepted by the reinsurer.

Occurrence An incident, event or happening; in reinsurance, per-occurrence coveragepermits all losses arising out of one event to be aggregated, rather thanhandled on a policy-by-policy or risk-by-risk basis; in casualty insurance

and reinsurance, this term may be defined as continual, gradual orrepeated exposure to an adverse condition that is neither intended norexpected to result in injury or damage, as contrasted with an accident orsudden happening; in property catastrophe reinsurance contracts,occurrence is usually defined as all losses within a specified period of timeinvolving a particular peril.

Occurrence Basis Traditional method of coverage whereby coverage is provided for lossesfrom claims which occurred during the policy period, regardless of when theclaims are reported.

Occurrence Limit A provision in most per risk reinsurance contracts that limits the reinsurersliability for all first involved in one occurrence.

Offset Clause(Setoff )

Reduction of the amount owed by one party to a second party by creditingfirst party with amounts owed by second party; another way to reducecredit risk; the deduction of loss payments from the premium owed a

reinsurer.Off-Shore Reinsurer A non-admitted reinsurer; ceding companies will not normally receive credit

for reinsurance recoverable due from such reinsurers in their statutorystatement unless they are properly secured.

Open Cover A facility under which risks of a specified category may be declared andinsured; infrequently used in reinsurance.

Operating Income(Operating Profit)

The sum of the net investment income and net underwriting income in anyreporting period.

Overhead Fixed charges which do not vary with the amount of business done.

Over-Line The amount of insurance or reinsurance exceeding the insurers orreinsurers normal capacity inclusive of automatic reinsurance facilities;above and beyond normal capacity


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Term DefinitionOverride(OverridingCommission,Overwriting

Commission)

The portion of the commission that the general agent or supervision agentkeeps; in reinsurance, the broker who receives a commission for placing aretrocession through another broker receives an overriding commission.

Over-Subscribed Term used in the broker reinsurance market to indicate when more thana100% has been authorized collectively by reinsurers on a risk.

Pari-Passu Means the equal treatment of reinsurer with regards to pertinent treatyconditions, usually used in the signing down of a share on an overplacedtreaty.

Participate To share in the writing of a risk.

Payback Period(Payback, AmortizationPeriod)

The period of time required for the premium to equal a single total loss, forthe underwriter to be made whole; a term used in the rating of per-occurrence excess covers and represents the number of years at a givenpremium level necessary to accumulate total premiums equal to theindemnity; a measure of how frequently a loss might occur under thecontract.

Peril Refers to the possible causes of loss in property insurance.Per Occurrence Excessof Loss Clause

A reinsurance contract provision that aggregates all losses arising out of asingle occurrence, subject to the ceding companys retention prior toreinsurance recovery.

Per Occurrence Limit A limit on the amount the reinsurer will pay as the result of a single eventor occurrence

Per Risk ExcessReinsurance

A form of property excess of loss reinsurance were the ceding companysretention and amount of reinsurance apply per risk rather than on a peraccident, event or aggregate basis.

Policy Acquisition Costs State premium taxes and agents commissions which must be charged asexpenses on a statutory financial statement.

Policy Profile A study which segregates an insurers policies into various groupings, e.g.,by policy limit or policy premium.

Policy Year Refers to all claims and premiums that stem from a set of insurance

policies issued over a 12 month period.Policy Year Experience Experience on business commencing with its effective date irrespective of

when the transactions (payment of premium or loss payment) may actuallyhave taken place; defines coverage or determines which losses will beincluded in calculation of an adjustable feature.

Portfolio Liability of insurer for unexported portion of inforce policies, outstandinglosses, or both for described segment of insurers business.

Portfolio Entry The mechanics of attachment of a reinsurance treaty at inception may bearranged on varying bases to new and renewal business or businessinforce.

Portfolio Reinsurance A 100% by transfer assumption of portfolio of a defined block of businessby acceptance of a block of policies inforce, a block of outstanding losses ora combination of both; may refer to treaty or automatic reinsuranceprograms, as distinguished from facultative reinsurance.

Portfolio Return The return of unearned reinsurance premium and loss reserves on inforcebusiness to the ceding company upon termination of a reinsurancecontract.

Portfolio Run-Off A method of canceling reinsurance that continues the reinsurance of aportfolio until the ceded premium is earned and/or all losses are settled.

Premium Capacity Refers to the aggregate premium volume an insurer or reinsurer insurercan write.

Premium Trend Factor The adjustment to reflect historical rate increases needed to project lossratios in a prospective period.

Primary Term applied to Insurer (insurance company originating the business),Insured (policyholder insured by primary insurer), Policy (initial policyissued by primary insurer to primary insured), Insurance (the insurance


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Term Definitioncovered under the primary policy issued by the primary insurer to theprimary insured; underlying insurance).

Priority Retention.

Pro Rata Reinsurance(Quota Share,Proportional,Participating, FirstSurplus, SecondSurplus, Surplus Share)

Generic term describing all forms of quota share and surplus reinsurance;reinsurer shares a pro rata portion of losses and premiums with cedingcompany; proportion may be either fixed or variable; one of the oldestforms of treaty reinsurance and the most common in property reinsurance.

Probable Maximum Loss The anticipated maximum property fire loss that could result given unusualor the worst circumstances with respect to normal-functioning protectivefeatures.

Prospective Reinsurance(Spread LossReinsurance)

Reinsurance of contractually defined occurrences that have yet to happen.

Prospective Rating Plan The formula in a reinsurance contract for determining reinsurance premiumfor a specified period on the basis, in whole or in part, of the loss

experience of a prior period.Provisional Rate Tentative figure for subsequent adjustment under a reinsuranceretrospective rating plan.

Provisional Notice ofCancellation

Unless both parties agree to continue to reinsurance beyond theanniversary date, the provisional notice of cancellation allows for thetermination of the reinsurance contract.

Provisional Premium In retrospective reinsurance rating plans, the ceding company pays thereinsurer a provisional premium, which is frequently a flat rate applied tothe ceding companys premium base; provisional premium is usually paidon a monthly or quarterly schedule and later adjusted in accordance withthe retrospectively rating plan formula.

Pure Loss Cost The ratio of the reinsurance losses incurred to the ceding companyssubject premium.

Pure Premium The portion of the premium that is allocated to enable the ceding company

to pay losses, but in which no loading has been added for commission,taxes or other expenses.

Quota Share Treaty The basic form of pro rata reinsurance whereby the reinsurer accepts astated percentage of each and every risk within a defined category ofbusiness; participation in each risk is fixed and certain; the primary insurerand the reinsurer agree in advance to a percentage for sharing policylimits, premiums and losses.

Rate The percent factor applied to the ceding companys subject premium toproduce the reinsurance premium or the percent applied to the reinsurerspremium to produce the commission.

Rate On Line Premium divided by indemnity expressed as a percentage of the limitexposed; similar to the concept of payback or amortization.

Recapture Term used in life reinsurance to define the action of a ceding companywhere it takes back from the reinsurer insurance previously ceded.

Reciprocal Exchanges Inter-insurance exchange; formed to provide insurance at minimum cost tomembers and owned by members; a voluntary, unincorporated associationconducting the business of reciprocal insurance, managed by an attorney-in-fact, in which every subscriber is both a policyholder and an insurer of allother subscribers.

Reciprocity The practice of requiring incoming reinsurance in exchange for reinsuranceceded or vice versa.

Reinstatement Clause When the amount of reinsurance coverage provided under a contract isreduced by the payment of loss as the result of one occurrence, thereinsurance cover is automatically reinstated, sometimes subject to thepayment of a specified reinstatement premium; reinsurance contracts mayprovide for an unlimited number of reinstatement or for a specific number


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Term Definitionor reinstatement.

Reinstatement Premium A pro rata reinsurance premium that may be charged for reinstating theamount of reinsurance coverage reduced as the result of a reinsurance losspayment under a catastrophe cover; property catastrophe covers almostalways call for reinstatement premium(s) when coverage is reinstated.

Reinsurance A transaction whereby the one party, the reinsurer, in consideration ofpremium paid, agrees to indemnify another party, the ceding company, forpart of all of the liability assumed by the ceding company under a policy (orpolicies) of insurance; reinsurer (assuming insurer) agrees to indemnify theceding company against all or part of loss which latter may sustain underpolicies issued; one of the prime functions of reinsurance is to providecapacity.

Reinsurance Assumed That portion of the risk the reinsurer accepts from the ceding company.

Reinsurance Ceded That portion of the risk that the ceding company transfers to the reinsurer.

Reinsurance AssistedPlacements(Reverse Flow Business)

The reinsurer serves as a facilitator for placement of a book of insurancebusiness from a direct production source (insurance agent, broker ormanaging general agent) to a ceding company; the reinsurer may reinsure

the book of business for the ceding company, though such reinsurance isnot mandatory.

Reinsurance Credit A ceding company can take credit for reinsurance premiums ceded andreinsurance losses recoverable in their Annual Statement if the reinsuranceis placed with an admitted reinsurer.

ReinsuranceIntermediary(Intermediary, Broker)

A solicitor of reinsurance companies who is engaged by the cedingcompany to place reinsurance on its behalf with markets of the brokerschoice or as designated by the ceding company; negotiates contracts ofreinsurance between a reinsured and reinsurer; provide services such asclaims handling, accounting, and underwriting advice; premiums paid abroker by reinsured are considered paid to the reinsurer, but losspayments and other funds (premium adjustments) paid a broker by areinsurer are not considered paid to the reinsured until actually received bythe reinsured.

Reinsurance Pool(Pool, Association,Syndicate)

An organization of insurers or reinsurers through which membersunderwrite particular types of risks with premiums, losses and expensesshared in agreed amounts or ratios; may be formed to share in a specialtyinsurance line that require special expertise or to address marketcatastrophe exposure; formed to spread reinsurance risks rather thanprimary insurance risks.

Reinsurance Premium Consideration paid by the ceding company to the reinsurer for the liabilityassumed by the reinsurer.

Reinsurance Program Combination of reinsurance contracts entered into by a ceding company.

Reinsured(Reassured)

The ceding company.

Reinsurer The insurer which assumes all or part of insurance or reinsurance riskwritten by another insurer.

Retention The amount of risk the ceding company keeps for its own account or

account of others.Remainder That amount of a risk which is to be reinsured, after determination of the

reinsureds retention.

Retroactive Reinsurance Reinsurance of contractually-defined occurrences that have alreadyhappened.

Retrocession A reinsurance transaction whereby a reinsurer (the retrocedent) cedes allor part of reinsurance risk to another reinsurer (retrocessionaire).

Retrocessionaire The reinsurer of reinsurance companies.

Retrospective Rating A plan or method that provides for the adjustment of final reinsuranceceding commission or premium on the basis of the actual loss experienceunder the reinsurance contract, subject to minimum and maximum limits;the final adjusted reinsurance premium is usually equal to the reinsurance


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Term Definitionlosses multiplied by a loss conversion factor.

Retrospective RatingPlan

The formula in reinsurance contracts determining the reinsurance premiumfor a specified period on the basis of the loss experience for the sameperiod.

Retrospectively RatedReinsurance

Reinsurance in which the ultimate premium paid by the ceding company isbased upon the ultimate liabilities assumed by the reinsurer under thecontract.

Retrocedent The reinsurer placing a retrocession.

Risk The uncertainty of loss; the tangible or intangible things, persons, entities,items, subject to a potential loss.

Risk Retention Group A group of two or more organizations authorized by the federal RiskRetention Act to pool and retain some or all of their exposures, therebygaining favorable income tax treatment of their contributions to related lossreserves.

Risk Transfer The extent to which insurance risk is shifted from the cedent to thereinsurer.

Risk-Based Capital The theoretical amount of capital that is needed to absorb the risks of

operating a business with financial obligations to customers; the amountnecessary to ensure that the business has an acceptably low expectation ofbecoming financially insolvent.

Run-Off(Run-Off Cancellation,Cut-Off Cancellation)

A termination provision of a reinsurance contract stipulating that thereinsurer shall remain liable for loss under reinsured policies inforce at thedate of termination, as a result of occurrences taking place after the date oftermination.

Schedule F The schedule on a companys Annual Statement that summarizesreinsurance transactions.

Second Event Cover A drop down clause used in property catastrophe reinsurance thatstipulates that if the ceding company sustains a loss greater than itsretention in one occurrence, it will have a lower retention in anysubsequent occurrence that takes place during the same annual period.

Second Surplus A form of reinsurance purchased by ceding companies that are wring

coverage for insureds with large limit policies; provides reinsurance forlines too large to be reinsured in a First Surplus contract; follows on theplan of the First Surplus, but provides a much diminished spread of risk toreinsurers.

Second-Event Retention A provision under which the ceding companys retention for excess of lossprotection (especially under catastrophe covers) is reduced for subsequentcatastrophes during the same reinsurance period.

Self-Insurance The setting aside of funds by an individual or organization to pay lossesand to absorb fluctuations in the amount of loss; losses are charged againstthe accumulated funds.

Self-Insurer An individual, partnership or corporation who retains all or part of the riskfor its own account.

Self-Reinsurance Creation of a fund by an insurer to absorb losses beyond the insurersnormal retention.

Shortfall Cover A facultative reinsurance cover, usually temporary, that is used to fill ingaps (shortfalls) in the ceding companys placement of its treatyreinsurance program.

Sliding ScaleCommission

A predetermined commission adjustment on earned premiums whereby theactual commission varies inversely with the loss ratio, subject to amaximum and minimum.

Slip The piece of paper submitted by the broker to the underwriters at theboxes in the room at Lloyds of London on which the Syndicatesaccepting the risk are identified and the extent of their participation isnoted.

Special Acceptance The facultative extension of a reinsurance treaty to cover a risk notautomatically included within its terms.


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Term DefinitionSpot Reinsurance Facultative reinsurance, usually applied to one item, risk, peril or location

for property, and to one vehicle, driver, premise, operation, job site activityor product for casualty.

Standard & PoorsClaims Paying AbilityRating

The opinion of S&P regarding the financial capacity of an operatinginsurance company and its ability to meet the obligations of its insurancepolicies in accordance with their terms.

Statutory AccountingPrinciples (SAP)

Those principles required by state law which must be followed by insurancecompanies in submitting their financial statements to state insurancedepartments; expenses must be recorded immediately and cannot bedeferred to track with premiums as they are eared and taken into revenue.

Subject Premium(Flat Rate, PremiumBase, UnderlyingPremium)

That portion of the ceding companys premiums to which the reinsurancepremium rate is applied in order to determine the reinsurance premium;the premium from the policies issued by the primary insurer that aresubject to the agreement (written or earned); a percentage rate applied toa ceding companys subject premium writings for the classes of businessreinsured to determine the reinsurance premiums.

Sunrise Clause A clause that provides coverage for losses reported to the reinsurer duringthe term of the current reinsurance contract, but resulting fromoccurrences that took place during a prior period; typically no longer foundin reinsurance contracts due to the genesis of the Sunset Clause.

Sunset Clause A clause that stipulates that the reinsurer will not be liable for any loss thatis not reported to the reinsurer within a specified period of time after theexpiration of the reinsurance contract.

Surplus The portion of the ceding companys gross amount of insurance on a riskremaining after deducting the retention established by the ceding company.

Surplus Line Any risk or part thereof for which there was no available market to theoriginal broker or agent; business, which would otherwise be subject toregulation as to rate or coverage, placed in non-admitted markets on anunregulated basis in accordance with the Surplus or Excess Line provisionsof state insurance laws.

Surplus Lines Brokers Brokers permitted to do business with non-admitted insurers, but only if

admitted insurers have declined to write the risk.Surplus Relief The use of admitted reinsurance on a portfolio basis to offset unusual

drains against policyholders surplus; the ceding company recaptures equityin unearned premium reserves on the business ceded through the cedingcommission allowed by the reinsurer against the gross premiums ceded.

Syndicate A group of companies or other underwriters who join together to insurecertain risks which may be of such value or hazard, or so expensive tounderwriter that it can be done on a cooperative basis more efficiently.

Surplus Share Treaty A form of pro rata reinsurance used primarily for property lines; reinsurerassumes a pro rata share of only that portion of any risk that exceeds theceding companys established retentions.

Sub-Broke The intermediary from whom another intermediary obtains business toplace.

Ticket Reinsurance A notation in the form of a separate piece of paper attached to the daily

report setting forth the details of reinsurance that has been effected.Time-and-DistancePolicies

Largely used by reinsurance syndicates at Lloyds of London to close thebooks on old underwriting years, based upon contractually specified cashflow payments between the ceding company and insured covering pastlosses.

Target Risk A large risk that attracts unusually keen competition among insurers,agents and brokers; a large hazardous risk on which insurance is difficult toplace.

Tariff Rate The insurance rate established by the rating organization havingjurisdiction over the class and territory.

Top and Drop Cover(Benefit Cover)

An excess of loss insurance contract designed by Lloyds to cover as the toplayer on an excess program or to act as a reinstatement on the lower


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Term Definitionlayers.

Total Insurable Value The total values for insured perils and coverage for a particular risk,whether or not insurance limits have been purchased to that amount.

Traditional Reinsurance Reinsurance where the primary motivation is insurance risk transfer.

Treaty A reinsurance contract under which the reinsured company agrees to cedeand reinsurer agrees to assume risks of a particular class of business.

Treaty Reinsurance A standing agreement, often obligatory and long-term in nature, between areinsurer and a ceding company that provides for the automatic cessionand assumption of the classes of risk specified in the treaty.

Trending The necessary adjustment of historical premium and loss statistics, topresent levels or expected future levels in order to reflect measurablechanges in insurance experience over time which are caused by dynamiceconomic and demographic forces and to make the data useful fordetermining current and future expected cost levels.

Trust Agreement A formal agreement whereby property is transferred with the intention thatit will be administered by one party, the trustee, for the benefit of another,commonly known as the beneficiary.

Unauthorized Reinsurer A reinsurer not licensed or approved in a designated jurisdiction.UnauthorizedReinsurance

Reinsurance placed with a reinsurer which does not have authorized statusin the jurisdiction in question.

Uberrimae Fidei The Latin term describing the reinsurance contract as one of utmost goodfaith between the contracting parties.

Unearned ReinsurancePremium

That portion of reinsurance premium applicable to unexpired portion ofpolicies reinsured.

Unlicensed (Non-Admitted) PrimaryInsurer

An insurer who has not been granted a license in that state.

Ultimate Net Loss The total sum which the ceding company becomes obligated to pay eitherthrough adjudication or compromise, for litigation, settlement, adjustmentand investigation of claims and suits which are paid as a consequence ofthe insured loss, excluding only the salaries of the ceding companys

permanent employees.Underlying In respect to excess of loss coverages, that amount of risk which attaches

before the next higher layer of insurance or reinsurance.

Underwriting Income The excess of premiums earned by a reinsurer during any reporting periodover the combined total of expenses and losses incurred by the reinsurerduring the same period.

Underwriting Profit The profit derived from reinsurance or insurance exclusive of that derivedfrom investments.

Unearned Premium That portion of the original premium that applies to the unexpired portionof risk; if the policy should be canceled, the company would have to payback the unearned part of the original premium.

Variable Quota ShareTreaty

The percentage of cession varies automatically by risk based on broad,objective criteria established in advance, such as size of risk or class.

Work Program A contract bond reinsurance term providing that reinsurance attaches at aspecified level of a principals total volume of work rather than on the moreconventional basis of individual contract or bond amount.

Working Cover A contract covering an area of excess reinsurance in which loss frequency isanticipated.

Working Layer An area of excess reinsurance in which loss frequency is anticipated; therating approach to such a layer is usually on a retrospective basis orsubject to a contingent commission or sliding scale commission.

Documents

46667566 Glossary of Re Insurance Terms